Obama’s Latest Tax Hike Shows Why Dynamic Scoring Matters

Commentary By

Curtis S. Dubay, a leading expert on tax reform, income tax, corporate tax, international taxes, and the estate tax, is a research fellow in tax and economic policy at The Heritage Foundation. Read his research.

President Obama has come out with another tax hike on the “rich” that will hurt all Americans. This is not surprising. Raising taxes on the rich has always been the centerpiece of his economic agenda—despite its negative consequences for those who are not rich. He has already raised taxes by more than $1 trillion, mostly on the upper income, through Obamacare and the fiscal cliff hikes in early 2013.

It is a mistake to expend too much energy parsing a policy proposal from a lame duck President who is no longer beholden to the electorate. His proposal has little chance of becoming law. However, President Obama’s new tax increase helps magnify the importance of the ongoing debate about dynamic scoring, supported by those who want Congress to have more complete information about major fiscal bills it considers, and opposed by those who (mistakenly) believe those effects are too uncertain to predict.

These latest tax hikes would consist of raising the capital gains tax to 28 percent (there is confusion whether this includes the 3.8 percent Obamacare surtax, so the rate could go as high as 31.8 percent), more heavily taxing assets transferred at death, instituting a bank tax, making 529 college savings accounts less attractive by taxing funds withdrawn from them even if they are used for education, and capping the amount that taxpayers could put into tax-preferred retirement accounts.

Although the tax increases are likely to be met with little fanfare in Congress, President Obama is proposing them to pay for tax cuts for the middle class at the same time. He would provide a $500 per year tax credit to families in which both spouses work, greatly expand the child care tax credit (for instance, for day care, not the $1,000 per child credit), and consolidate existing educational tax credits.

Helping certain middle-class families (the ones that qualify for the tax cuts; one-worker households, for instance, would be left out) is bound to be popular with some in Congress. But before supporting the President’s plan, they need more information than just the size of the proposed tax cut in order to determine whether it will actually help those middle-class families who are struggling to increase their incomes in the slowly recovering economy.

President Obama’s tax hikes all target investment and will significantly raise the cost of capital, which will lower its formation across the economy. Less capital will mean a slower growing economy, fewer new jobs, and lower wages for Americans at all income levels, including the middle class.

Traditional static scoring employed by the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) would show only that taxes decreased for the middle-class families who qualified for the tax cuts. This scoring would not show how a slower growing economy would have a negative impact on these families as well. Hence, Members of Congress would make a decision about the President’s plan with incomplete information.

It is possible that when taking into account the negative dynamic impact of President Obama’s tax increase, that the entire middle class will be worse off than it is today. His tax hikes on investment are broad based and the rate increases are relatively large. His tax cuts are narrowly targeted to particular middle-class families that meet the criteria he set out.

It is an empirical question whether the tax hikes will hurt the middle class, or if they will only significantly erode the benefit of the tax cut. Modelers will surely analyze the plan once they have more details. But there is little doubt that the benefits for the middle class will be much less than President Obama is touting.

Nevertheless, if it were to come to a vote, Members of Congress could vote on the proposal based on the incorrect assumption that they are boosting the incomes of middle-class families, when in fact the exact opposite could be true.

That is why it is imperative that the JCT and CBO move to dynamic scoring, which would show the negative impact of the President’s tax hikes on the middle class. That way Congress could make a more fully informed decision on the plan.

It is also why it was a major step forward when the House recently passed a rule instructing the JCT and CBO to provide dynamic estimates.

As the debate over dynamic scoring continues, it is important to remember that its purpose is not to magically make it look like tax cuts pay for themselves, as opponents often suggest. Its purpose is to give Congress more information and to stop Members from supporting legislation that would have the opposite effect of which they intend.

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